Explore the tax benefits of charitable giving in India. Discover how donating appreciated assets, volunteering, and creating a charitable trust can further reduce tax liability.
Charitable giving is an essential component of social responsibility, and it is an activity that is beneficial for the recipients and donors. In India, giving back to society has been an age-old tradition and an integral part of our culture. Charitable giving has become even more crucial today, where the gap between the haves and the have-nots is increasing alarmingly. In addition to its altruistic value, charitable giving has many tax benefits. Understanding these tax benefits allows you to maximise your contributions while reducing your tax liability. This article will explore the tax benefits of charitable giving in India and how you can make the most of them.
Top Tax Benefits of Charitable Giving in India
-
Tax Deductions Under Section 80G of the Income Tax Act
Section 80G of the Income Tax Act offers tax deductions to donors who contribute to eligible charitable organisations. Both individuals and companies can claim these deductions. The deduction amount depends on the organisation to which the donation is made and can range from 50% to 100% of the donated amount.
However, ensuring that the organisation you are donating to is registered under Section 80G of the Income Tax Act is essential. Not all charitable organisations are eligible for tax deductions under this section. Therefore, it is necessary to check the organisation’s eligibility before donating.
-
Tax Exemptions Under Section 35AC of the Income Tax Act
Section 35AC of the Income Tax Act offers tax exemptions to companies contributing to eligible charitable organisations. Under this section, companies can claim a 100% deduction of the amount donated. The contribution must be made to organisations engaged in specific activities such as promoting education, health, or rural development.
It is important to note that contributions made under this section are eligible for tax exemptions only if they are made before 31 March 2022. This section is set to expire on 31 March 2022, and its continuation will depend on the government’s decision.
Transform your tax outlook – Utilize our Income Tax Calculator for proactive financial planning.
-
Donating Appreciated Assets
Donating appreciated assets such as stocks, mutual funds, or real estate can effectively maximise your charitable giving while also minimising your tax liability. When you donate appreciated assets, you can claim a tax deduction for the asset’s fair market value at the time of the donation.
This deduction can be claimed in addition to any deductions under Section 80G or Section 35AC. In addition to the tax benefits, donating appreciated assets can be an excellent way to diversify your portfolio and reduce your exposure to market volatility.
-
Creating a Charitable Trust
Creating a charitable trust is another effective way to maximise your charitable giving and minimise your tax liability. A charitable trust is a trust set up for a charitable purpose, and it can be used to support various causes such as education, healthcare, or poverty alleviation.
Under the Income Tax Act, donations made to charitable trusts are eligible for tax deductions under Section 80G. In addition, creating a charitable trust can offer several other tax benefits, such as exemption from wealth tax and lower stamp duty rates.
-
Donating to Political Parties
Donating to political parties can also offer tax benefits under Section 80GGC of the Income Tax Act. Under this section, donations made to registered political parties are eligible for a 100% tax deduction without any limit on the amount donated.
However, it is important to note that donations made to political parties cannot be made in cash. The political party must be registered with the Election Commission of India.
-
Corporate Social Responsibility (CSR)
Corporate Social Responsibility (CSR) is a legal requirement for companies in India. Under the Companies Act 2013, companies with a net worth of ₹ 500 crore or more, or a turnover of ₹ 1000 crore or more, or a net profit of ₹ 5 crore or more are required to spend at least 2% of their average net profits of the preceding three financial years on CSR activities. CSR activities can include various social causes such as education, healthcare, and environmental sustainability.
The contributions made by companies towards CSR activities are eligible for tax deductions under Section 80G of the Income Tax Act. In addition to this, any income earned from CSR activities is also exempt from income tax.
-
Volunteering for Charitable Organisations
Volunteering for charitable organisations can also offer tax benefits under Section 80GGA of the Income Tax Act. This section offers tax deductions to individuals contributing to scientific research or rural development.
Volunteering for charitable organisations can offer several other benefits, such as personal satisfaction, social recognition, and skill development.
Click here to know about: Income Tax Return Filing
Blending Lifetime and Legacy Giving
Charitable trusts offer opportunities to make a positive impact during your lifetime and beyond. Depending on your circumstances, there are various options available, with two commonly used ones being charitable remainder trusts and charitable lead trusts.
Charitable Remainder Trusts:
- A charitable remainder trust (CRT) is an irrevocable trust that allows the trust’s owner (grantor) to convert highly appreciated assets into an income stream.
- By transferring the assets to the trust, the grantor can receive a tax deduction, avoid capital gains taxes upon selling the assets, and potentially reduce future estate taxes.
- After the grantor’s death or the designated term of the income stream, the remaining trust assets are passed on to qualified charitable organisation(s) chosen by the grantor.
Charitable Lead Trusts:
- Charitable lead trusts (CLTs) are the opposite of charitable remainder trusts, also being irrevocable trusts.
- In a CLT, an income stream is paid out to a qualified charitable organisation for a specified period.
- Once that term concludes, the remaining trust assets are transferred to the grantor’s heirs.
- The grantor receives a tax deduction based on the present value of the income stream donated to charity, and assets can be removed from the estate while avoiding gift or estate tax consequences when transferring them to heirs.
Conclusion
Charitable giving tax benefits society and offers several tax benefits to the donors. By understanding these tax benefits and making strategic contributions, donors can maximise their contributions while reducing tax liability. It is essential to ensure that the charitable organisation you donate to is eligible for tax deductions under Section 80G or Section 35AC of the Income Tax Act. Additionally, donating appreciated assets, creating a charitable trust, and volunteering for charitable organisations are other effective ways to maximise your charitable giving while minimising your tax liability.
Vakilsearch can assist individuals and companies in making charitable contributions while also maximising tax benefits. Our team of experts can help identify eligible charitable organisations and ensure compliance with the Income Tax Act. Additionally, we can assist in creating a charitable trust, donating appreciated assets, and volunteering for charitable organisations. With Vakilsearch, you can positively impact society while also minimising your tax liability.
FAQ
Can I Get a Tax Deduction for Donating to a Tax-Exempt Organisation?
By making generous donations to NGOs such as Care India or any government organisation, you can avail a 50% tax exemption, reducing the amount of taxes you are required to pay.
Is There a Limit on the Amount of Donations That Can Be Deducted?
The maximum eligible amount for tax exemption under Section 80G will be calculated as 50% of the lesser value between a) the donated amount (₹ 90,000) and b) the qualifying limit (₹ 75,000).
What Do I Do if I Have Donated More Than the Annual Limit?
Depending on the situation, you have the option to claim either a 100% or 50% deduction of the donated amount, with or without an upper limit.
Other Related Articles:
